Fiscal federalism UK: total mess

Currently, the UK is stumbling forward, almost blindly, in an inexorable movement towards an incoherent degree of fiscal federalism.

Devolution to Scotland, Wales, and Northern Ireland over the last number of decades has been prompted by a need to resolve certain political problems as they have arisen and are still arising. The strongly centralised nature of the British state and the traditionally British empirical method of dealing with problems, including fiscal federalism, are no longer sufficient to deal with the pressures for change. In relation to Scotland the fissiparous tendency is evident. But there are other tensions arising from the growth of English nationalism, relatively dormant until the last few decades, and now asserting its right to be heard, both in the UK and within the EU, given a strident and discordant voice by UKIP to match the ultra demands of the SNP.

Hence, we are now moving to a situation in Scotland which is approaching the fiscal federalism of Switzerland and going in the direction of Canada. But this is not being accompanied by a parallel devolution to Wales or to the English regions, outside London.

The response of Whitehall and Westminster has been to provide ‘devolution on demand’ for England. Instead of real devolution, ad hoc groupings of English local authorities, Combined Authorities, are ostensibly being ‘awarded’ new powers in relation to transport, skills, and economic development and £30m a year to establish a regional infrastructure fund.

This ‘enhanced localism’ – principally initiated to address the economic imbalance between the North and the South-East of England – is a form of decentralisation of spending and of limited tax-sharing, but it falls far short of the regional fiscal and political settlements which would usher in a constitutional fiscal federalism, akin to that allocated to the nations in the UK.

This is not to argue for an immediate parallel re-allocation of fiscal powers to the English regions that are now being settled on Scotland, and to a lesser extent Wales, or Northern Ireland, but a start should be being made in that direction and within the same constitutional legal framework.  a ‘variable geometry’ approach will be an appropriate way forward, linked to demand for powers on the ground in each of the regions.

That some decentralisation of governance in the UK is required, and more particularly in England, is now common political ground for all political parties. Such changes necessarily involve degrees of fiscal federalism and hence considerations of equity, efficiency, and accountability.

The existing institutions, including those of local government, will inevitably argue for reforms which will enhance their role. The issue is whether the Combined Authority approach, currently being pursued in England, will meet the long-term internal constitutional and economic needs of the UK, set in a changing and challenging European Union context. The answer is that it will not.

One economic problem is that the Combined Authority approach, initiated by George Osborne in relation to Greater Manchester and surrounding local authorities, is essentially based on a city-region economic growth model. This dated model is flawed in analytical terms and is not sustainable on empirical grounds, as a 2014 Cambridge University study demonstrated. (See here too for a positive view).

There is a need for a clear, rational approach to fiscal federalism, but the path to the final destination should be gradual. This path may lead to a multi-speed approach in England to it and to constitutional political devolution, allowing regions to be able to learn of any problems in implementation from other regions or from Scotland, Wales, or Northern Ireland.

My paper concludes that unless there is a genuine federal constitutional settlement for the UK as a whole, involving a step-by-step move to full economic and political devolution for the regions of England – then a comprehensive and sustainable UK-wide fiscal federalism will not be achieved and the rationale for an independent Scotland will, thereby, be strengthened.

It is imperative that there is established a UK Constitutional Convention to establish the guidelines for a rational and pragmatic approach to the achievement of a balanced fiscal federalism which meets both political and economic objectives for the whole of the UK.

This blog is based on a new Federal Trust paper written by the author

Leave a Reply

Your email address will not be published. Required fields are marked *